Federal government approving billions in spending without knowing long-term implications

OTTAWA — The Conservative government has been approving tens of billions of dollars of budget measures, having large impacts on its fiscal position, without Cabinet always knowing the long-term financial consequences of the decisions, the federal auditor general says.

The new findings come as Parliamentary Budget Officer Kevin Page threatens to take the federal government to court to obtain long-requested information on the impacts of billions of dollars of cuts announced in the 2012 budget. Page has promised to serve legal notice this week to several major federal departments.

In his fall 2012 report released Tuesday, Auditor General Michael Ferguson concluded the Department of Finance Canada often does not take into account the impact of tens of billions of dollars of spending and tax measures on the government’s long-term fiscal sustainability.

Furthermore, the lack of federal reporting about long-term economic consequences of major government decisions means parliamentarians are forced to vote blindly on some budget measures without knowing their true impact on the country’s finances, the report says.

Just hours after the auditor released his report, the Finance Department unveiled a sweeping study on the economic and fiscal implications of Canada’s aging population. It projects that a greying society will translate into slower growth for the economy and government revenues, and additional stresses on public finances.

The auditor’s report says long-term financial projections are important because Canada faces many challenges that could impact the country’s fiscal sustainability, such as changing demographics, climate change and aging infrastructure.

The Harper government promised in its 2007 budget to publish a comprehensive report on the government’s fiscal sustainability that would provide a broad analysis of current and future demographic changes, and the implications on Canada’s long-term fiscal outlook. A draft report was prepared in 2007, but it has not been published.

Moreover, the long-term fiscal sustainability analyses have been regularly prepared since 2010, but have not been made public.

In contrast, governments in several Organization for Economic Co-operation and Development (OECD) countries have regularly published such reports.

“This lack of reporting means that parliamentarians and Canadians do not have all the relevant information to understand the long-term impacts of budgets on the federal, provincial and territorial governments in order to support public debate and to hold the government to account,” the audit says.

The report found the Finance Department examined the long-term fiscal sustainability implications of major policy decision only when officials considered it relevant, an approach the auditor general said is reasonable. However, the report also concludes Finance Minister Jim Flaherty was not provided with projections about the long-term financial impact of measures announced in the March 2012 budget until August 2012.

“This means that senior management and the Minister of Finance were not informed of the overall impact on the government’s long-term fiscal position until well after they had approved the budget measures,” the report says.

The federal government did not conduct long-term fiscal projections of the impacts of multibillion-dollar major policy decisions such as reducing the GST to five per cent and offering a GST/HST credit to low-income earners, since it did not expect the costs relative to GDP to grow, nor did it examine the long-term fiscal implications of pension income-splitting.

Federal officials did, however, examine the long-term implications of other major measures reviewed by the auditor, including trimming the annual funding increases in health transfers to the provinces, and increasing the eligibility age for Old Age Security to 67 from 65.

The decision to raise OAS eligibility to age 67 could save the federal government more than $10 billion annually by 2029, when the changes will have been fully implemented, the report says. The federal government projected earlier this year it would save $10.8 billion annually from the OAS reforms.

The audit also notes that in 2009, a report commissioned by the Finance Department on pension systems found there was “no pressing financial or fiscal need to increase pension ages in the foreseeable future.” The government, nevertheless, proceeded with changes to OAS eligibility.

The Conservative government has agreed to implement recommendations from the auditor general, including:

– Beginning with Budget 2013, the Finance Department will provide the finance minister with an assessment of the overall long-term fiscal implications of new budget measures before the budget is finalized; and

– The Finance Department will publish long-term fiscal analyses for the federal government on an annual basis, by 2013 at the latest.

The auditor’s report says the series of measures announced in the 2012 federal budget, including changes to OAS, have “significantly improved the government’s fiscal outlook.”

With the AG’s report still warm, the Finance Department released a long-term outlook that said the government’s moves to tighten purse strings, shrink the growth in health transfers to the provinces and increase OAS eligibility age were necessary for the country’s long-term financial health.

The measures will help the government “avoid the need to take drastic or inequitable actions in the future, such as significant tax increases or service reductions,” the Finance Department says in its report.

A recent report from the parliamentary budget officer (PBO) concluded the Harper government’s reforms over the past year to the Canada Health Transfer and Old Age Security, along with its ongoing savings in operating spending, mean the federal government’s finances are sustainable over the long term.

But the report from the PBO said the Conservative government’s changes to health funding will ultimately download billions of dollars in health costs annually to the provinces.

The auditor’s report also found the federal government has committed more than $1 billion to two key transfer programs in the aerospace sector — including the Bombardier CSeries aircraft program — but is unable to adequately determine whether program objectives and outcomes are being met and benefits secured.

Since 2007, Industry Canada has approved $1.2 billion for the Strategic Aerospace and Defence Initiative — Ottawa’s second-largest direct spending program on research and development — as well as the Bombardier CSeries commercial jet program.

The audit found Industry Canada has implemented a number of reporting improvements since 2010, yet several problems remain.

For the Bombardier CSeries program, the project progress reports that were required by funding agreements “contained limited information on outcomes and benefits,” while site visits were not documented very well, the AG’s report says. As a result, the government had “a more limited picture of the recipient’s performance.”

Also, no implementation review or evaluation of the CSeries program has been conducted (although government says one will be reported in 2015-16).

“This means that no formal assessment of the program is planned before all funding has been disbursed. As a result, the (Industry) Department is missing an opportunity to make potential timely improvements to the program,” the report says.

Senior Parliament Hill reporter for the Ottawa Citizen, politics junkie, wannabe pro golfer and someone who has wordsmithed at newspapers in Ontario, Alberta and Saskatchewan. I've covered politics at... read more every level, including city hall in Ottawa and Calgary, the Alberta legislature in Edmonton and now back in Ottawa covering the Hill.View author's profile